Expert: Josh - 9/20/2009

Question
QUESTION: Hi, I have to apologize for not knowing some 'basic' math but I've always had an issue with it. I do want to teach kids, but this inner insecurity with math does not help. Long story short, I want to move out of my parents's house. I just graduated college, got bills to pay and medical ones as well. My question is about moving out and saving enough money by calculating how much I would need for each based on a future part time job. (Been ill to work so far). Ok, here it goes. Say I work 7.25 an hour a 5 day work week. I get a paycheck every 2 weeks. I'd like to calculate how this would be for a month and a year. However, not all months are created equal some end with 28 days or 31. This part throws me off. So for a guess would it be 5 (days) X 6 (hr) or must I convert days into hours?=30hr work week.

The second guess is say rent, gas, water, insurance, car, car insurance. How best easily can someone calculate this. Thank you.

ANSWER: Hi H,

As I often say, everyone struggles with something. So please don't feel bad as most people "suck" in certain things; just do the best that you can. Remember that you have come a long way graduating college, this is an achievement in itself.

I think there are two aspects to your problem. 1) Calculating your income (weekly, or monthly) and 2) Making sure you have enough money to pay for rent, gas, water, medical, insurance etc. when  the bills are due.

For (1), $7.25 x 6 [hours/day] x 5 [days/week] gives roughly $217.5 per week.
For (2), the situation becomes quite complicated when the due dates do not all coincide on the same day as your pay day. Usually, bills are due by the end of month (for rent), however, the electricity and water bills might be charged once every quarter. With insurances, you may get the option of paying every fortnight or every month. If you can organize auto-payment from a nominated account, you may qualify for certain discounts. But, you have to be discipline, because over-drafting will incur heavy penalty from your bank. So, be careful, be very conservative, and don't spend money that you don't have. As an extension of this principle, I think you need to give some thoughts to a contingency plan.

a) what if your employment is terminated (touch wood this will not happen) or interrupted due to unforeseen circumstances, how long can you survive with the money you have saved? I think as a minimum, a 6-8 week buffer is at least necessary to cushion the effects, just in case you hit a rough trot. There is a lot of risk in running a tight ship, e.g., what if payment is delayed etc.
b) can you increase your level of resilience by cutting down unnecessary spending? when the going gets tough, you might be forced to make a list of all the things you do, and make some hard decisions axing all luxury items. The easiest way to realize this goal is to prepare lunch for work and eat at home as much as possible. Even fast food costs too much.

Let us do some preliminary calculations before we add a safety margin:

EARNING:

[A] $435 per fortnight income (before tax).
   Assuming you have 4 weeks break or holiday each year, during which you earn nothing, your net annual income is around ($217.5 x (52-4)) $10440 per year (before tax).

TAXATION:
[B] Using 2007 federal figures (see http://www.irs.gov/formspubs/article/0,,id=164272,00.html),
this income level would attract 10% tax on the first $7,825 and 15% on the remainder. Tax = 0.10 x 7825 + 0.15 x (10440-7825) = $1175. Therefore, your approximate net income is (10440-1175) = $9265 per annum. This leaves your net income at around "$356.34 per fortnight".

COST OF LIVING:
Your will need to estimate these yourself as the cost is different for each city.
[C] Food:  $ F     /week      [convert this figure to]  $     /fortnight [multiplying F by 2]
   Water: $ W     /quarter   [convert this figure to]  $     /fortnight [dividing W by 6.5]
   Electricity+Gas: $ E    /quarter [convert this to]  $     /fortnight [dividing E by 6.5]
   Rent:          $     /fortnight
   Travel:          $ T    /week    [convert this to]  $     /fortnight [multiplying T by 2]
   Insurances:      $ I    /year    [convert this to]  $     /fortnight [dividing I by 26]
   Misc. (personal luxury)          $     /fortnight

=============================================== Total:  $ C/fortnight

ANY LEFT OVER?
[D] Add up all the $/fortnight items above, subtracting C from 356.34 will give you a fair indication whether moving out etc. is affordable. Hopefully, this will turn out to be a healthy positive figure. Continue only if your income exceeds the cost of living.

The next part is to add some sort of safety margin to buffer against unexpected events (nasty surprises). As I mentioned earlier, it's good to have AT LEAST 8-12 weeks of reserve in your bank balance to hold out in case you lose your income. i.e., you should have saved (be able to afford) 4 to 6 times C without the need of borrowing money. If you can't do that, you may run into a cycle of debt. This, you must try your hardest to avoid. If you can build this sort of buffer, it matters little whether bills are due at the start of the month, and your work payment is received in the middle or at the end of the month. Building this reserve is critical.

The second analysis tool is a simple one. Circle important dates (payments, bills for gas/electricity, rent etc.) on a calendar. This way, you can work out and MONITOR the amount of income and spending on a week by week basis. You can also look ahead and do some modeling using an electronic spreadsheet (not on paper).

The third suggestion I have is to increase your expenditure estimates. This means multiplying the figure C (obtained in section [C]) by 1.2 or even 1.5 etc. to come up with a worst case scenario. This would signal to you just how vulnerable you are against rising prices, over-spending and accidental costs. Very likely, you may not be able to afford as many things as you will very soon run into the red using this "cost multiplier". But it allows you to assess your risks and revise your budget to strengthen your position.

I hope you will find some of the things useful.

---------- FOLLOW-UP ----------

QUESTION: I heard you can get an actual dollar amount of taxes you get taken out of your check. I know there's Federal, Medicare etc. I live in PA and wonder how much is automatically taken unless it's already 10 percent if I'm low income.

Answer
I am not familiar with the US tax system. But if it is anything like the Australian tax system, in your case somewhere between 10% to 15% of your income will be deducted from your salary before it enters your pocket. At the end of the financial year, if more than your fair share was deducted (after taking any tax offset measures into account), you may be eligible for a refund.

For an annual income of $10440, about $1175 will be already deducted from your salary (more or less). So, you will get paid around $356 instead of $435 per fortnight.